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The report on “Managerial Accounting” will help us understand the concept of managerial accounting and how it is useful to the organization and the management. In our report, we will make a detailed discussion on the activity-based costing and its features. Also, there will be a part of the report that will make us understand how the cost information is useful to make decisions. Through this report, we will understand the applicability of activity-based costing in various sectors. There will be a case-study on a real-life organization that uses activity-based costing to understand its concepts in a better manner. Thus, the report will provide us the complete information and concepts of activity-based costing.
Table of Contents
List of References
Management Accounting or Managerial accounting refers to the process of providing financial information and resources to the managers for making various decisions in the organization. These are used internally by the management for taking decisions at various stages during the production process. The objective of management accounting to have control over the business and its activities to make proper & accurate decisions. It will help in the growth and success of the organization. The costing system which I have selected for analysis in Activity-Based Costing. It will be studied in detail along with a case-based empirical study from a journal taken from the sources prescribed.
This report on Managerial Accounting will help us to understand the purpose of management accounting in an organization, especially the cost accounting systems. It will also help us to understand how it is important and useful for the managers for making decisions. Also, through the use of a journal in this report, a detailed analysis will be carried out regarding the use of management accounting in a company and how it is used by the managers in real-life to make various decisions.
An activity-based costing system is a method of costing which is used to assign the overhead costs and indirect costs to the related products or services based on value-adding activities. In this method of costing, the activities are used as a base in the calculation of costs related to a particular product or service. It is used in such a way that first costs are traced to activities and then to the products. There are many benefits of activity-based costing in an organization, but the most important of all of them is it helps define the activities of the organization in terms of value-added activities (Drury, C.M., 2013).
The activity-based costing or ABC system has its main focus on the process related to production and operations, strengthening of the activity-based cost management, improving activities, and cost allocations. The main industries were the ABC system is used is in manufacturing sectors as it helps in enhancing the reliability of data (Almeida, A. and Cunha, J., 2017). This helps incorrectly estimating the costs and also provides a better classification of costs that an organization incurs in the processes carried out during production. Along with advantages, there are certain disadvantages of activity-based costing which include difficulty in data collection to make certain calculations, problems about the selection of cost drivers, assigning of the common costs, etc.
Features of Activity-Based Costing
Some of the most important features of “Activity-Based Costing” or ABC system are explained as below:
The two Australian Companies for which activity-based costing is suitable and can be used as a system of ascertainment of cost are as follows:
BPH Ltd is an Australian company that is dealing with withholding investments in biotechnology and resources. It also deals in oil and gas exploration and is listed in the Australian Securities exchange. Since there are many complex processes and activities involved in BPH Ltd using activity-based costing is most suitable. Also, the company has a diversified portfolio in different sectors. Thus, using an activity-based system in the company will help in analyzing the costs from activities in different areas and to decide which is one of the businesses is most cost-effective. It will provide the company with information regarding the cost behavior that will help in proper cost management and decision-making.
The Sky City Entertainment group (also known by Sky city) is a service sector company in Australia dealing in gaming and entertainment. It hasheadquarters in Auckland, New Zealand. It has various hotels, restaurants, luxury hotels, etc. Application of the ABC system in service sectors like airlines, insurance, banks, hotels can be very useful. Therefore, being a company in the hotel business, Sky City Entertainment Group can use an activity-based costing system. The management of Sky city will get accurate information about the activities and how the cost is allocated to cost objects which will help them to get reliable figures regarding the cost of services being provided. Doing so, they will have proper control over costs that is useful for deciding the accurate price for their services. By using the ABC system, Sky City Entertainment Group can increase its profitability.
Some of the advantages of using activity-based costing (Kumar, N. and Mahto, D.G., 2013)in both the companies as discussed above are as follows:
Cost information plays a very important role in the decision-making process. For any organization or management, one of the important tasks is to have proper control over the operations, sectoral activities, different cost drivers and objects, and also the cost incurred for each. Cost information will help to monitor and keep a track of all the activities and operations in an organization. Analyzing the costs in detail like calculation of the production cost, identifying and evaluating the losses, estimating the efficiency of work, etc. will help in having proper financial control (Horngren, C.T., Datar, S.M. and Rajan, M.V., 2015).
We have selected two organizations, i.e. BPH ltd and Sky city Entertainment for our assignment of managerial accounting as discussed above. Now, we shall see the importance of cost information in both organizations for decision-making.
Use of cost information for decision-making in BPH Ltd:
Use of cost information for decision-making in Sky City Entertainment Group:
The article that I have selected is based on activity-based costing and is attached separately. The case study is based on activity-based costing in Greenfield Hills Apartments.
The activity-based costing system was designed and implemented in the following manner in Greenfield Hills Apartments.
The first thing that was done here was that a detailed discussion was carried out with the employees of Greenfield Hills apartment to determine the activities carried out in the running and maintaining the apartments. Nine activities were identified that were required and they were as follows:
In addition to the above activities, the supervisor analyzed and suggested the cost objects like one-bedroom units, two-bedroom units, recreation centers, etc. After deciding on the activities, the next step in ABC was cost allocation to the nine activities as discussed above. It was done in the following manner:
40% to activity 6
60% to activity 7
40% to activity 1
50% to activity 2
10% to activity 4
20% to activity 2
60% to activity 4
20% to activity 6
15% to activity 1
10% to activity 2
35% to activity 4
15% to activity 6
And remaining evenly to other activities
45% to activity 4
20% to activity 6
And remaining evenly to other activities
Heat and air conditioning
50% to activity 4
25% to activity 6
The remainder evenly to 3,5,7 and 9
After various discussions involving the management, it was decided to re-allocate the costs that were assigned to activity 9, i.e. general management to all the other seven activities excluding activity 6 in the following way
Activity 1 – 15%, Activity 2 – 5%, Activity 3 – 20%, Activity 4 – 25%,
Activity 5 – 10%, Activity 7 – 15%, Activity 8 – 10%
After allocating the costs, the next step was to identify the cost drivers for each of the activities and the cost objects to which it shall be allocated. The details of the cost drivers and how it was selected is been provided in the journal. It is the complete design of the activity-based costing in Greenfield Hills Apartments which had taken almost four days. An example of the same is indicated in the journal.
Therefore, from the above discussions it is clear that activity-based costing implementation in any organization involves the following steps:
By following all the above steps and as seen that Greenfield Hills Apartments follows all the steps as discussed, the design of activity-based costing can be decided with the help of management and implemented successfully in the organization.
Based on the activity-based costing article, the features of ABC Costing as discussed in Part A (Question 1) are satisfied to a great extent.
One of the features as discussed for ABC Implementation is that it requires the strong support of the management. As seen in the journal chosen for our study Greenfield Hills Apartments the entire management (employees, supervisors, managers, etc.) were involved in the successful implementation of activity-based costing in the apartment. Many interviews and discussions were held in the company to decide the activities, cost objects, cost drivers, and in what proportion the cost shall be divided according to the ABC costing systems.
Another feature as discussed was that appropriate cost drivers have to be identified to allocate the costs to the cost objects. This feature was also present in the activity-based costing implementation process of Greenfield Hills Apartment. The cost drivers for each of the nine activities (reclassified into eight activities) were identified and mentionedthrough the discussions with the management and employees.
Another feature is that cost drivers dictate the cost behavior patterns in a company. In our case study on Greenfield Hills Apartment, the cot drivers were used to determine how the various overheads shall be divided among the activities based on the cost objects.
A detailed discussion of the cost information to the organization and the management for various decision-making purposes was made in Part A (Question 3). Based on the journal that is selected for our analysis, Activity-based costing in Greenfield Apartments, it was observed that the cost information was very useful to the internal users in the organization. It helped inhaving control over the costs distributed over different activities. The implementation of activity-based costing in Greenfield Hills apartment will inaccurately decide the product and service costs in the organization, thus leading to more correct and reliable pricing decisions by the management.
Implementing an activity-based system in Greenfield Hills apartment will help the internal management in decision-making by clearly identifying and understanding the different overheads and activities in the company. It will also help the management in framing an overall picture of the cost behaviors in the organization. This will be beneficial to reduce cost in unnecessary activities and also eliminating those activities which do not add any value to the company. Using an activity-based costing system, management can get useful information that will help them to understand in a better manner the firm's competitive advantages, strengths, and weaknesses. It will also help in identifying those processes in the production system which are ineffective and inefficient and finding out different ways in which it can be improved. In Greenfield Hills Apartment, if activity-based costing is used it will help the management in making better quality decisions by knowing the nature of the various activities in detail.
In Activity based costing system as used in the Greenfield Hills Apartment, there are many benefits of the ABC system of costing which can be used and implemented by the contemporary companies which would be beneficial. The Activity based costing could be useful as it will help the companies to be able to allocate the cost on the basis of the work done by the companies. The cost would be allocated on the basis of the work done by such company. This will give the management a comprehensive analysis of the various activities in the organization and a better understanding of the firm production lines. The identification of the production lines and the cost involved in such lines would help the management to make future decisions on the reduction and optimization of such costs and derive maximum benefit out of the same. The ABC system of costing will also help the companies to identify the strengths and weakness of the production system as used by the organization which will lead to the increase the level of controls on the cost management of the company and thereby control the cost and thus profit margin can be maximized by reduction of the cost.
The report has helped us to analyze the overall concepts, features, applicability, advantages, and disadvantage of using Activity-based costing in an organization. The practical application and the steps involved in the implementation of ABC in the organization are clearly understood through a case study on Greenfield Hills Apartments. Thus, we can conclude that activity-based costing is a completely different way of managing the various costs of the organization and optimizing the profit-margins. If the Activity-Based Costing is implemented with the correct purpose and proper understanding of the system, it can bring long-term value to the organization.
Drury, C.M., 2013. Management and cost accounting. Springer.
Horngren, C.T., Datar, S.M., and Rajan, M.V., 2015. Cost accounting: A managerial emphasis.
Brewer, P.C., Garrison, R.H. and Noreen, E.W., 2015. Introduction to managerial accounting. McGraw-Hill Education.
Almeida, A., and Cunha, J., 2017. The implementation of an Activity-Based Costing (ABC) system in a manufacturing company. Procedia Manufacturing, 13, pp.932-939.
Kumar, N., and Mahto, D.G., 2013. Current trends of application of Activity Based Costing (ABC): A review. Global Journal of Management and Business Research Accounting and Auditing, 13(3).
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